Lloyds Bank has 632 branches up for sale but no indicative offer has yet to be made. Photograph: Peter Macdiarmid/Getty Images

Lloyds Banking Group insisted on Thursday it had "credible" bidders for the 632 branches it has up for sale as it confirmed that a £3.2bn provision for compensating customers who were missold payment protection insurance drove the bank into the red the first half.

As the loss of £3.3bn was announced, chief executive Antonio Horta-Osorio, who took the helm on 1 March, said Lloyds remained in talks with the independent commission on banking (ICB) to try to avoid being forced to sell even more branches when the final report by the commission is published on 12 September.

"We have had a good and engaging process with [the ICB]," said Horta-Osorio, whose bank is 41% owned by the taxpayer. "It is a useful and productive dialogue."

The costs associated with the branch sale, which has been demanded by the EU in return for £20bn of state aid, were £47m in the first half. The sale comprises about 4.6% of the UK current account market although the ICB, chaired by Sir John Vickers, has indicated even more branches could be sold to bolster competition on the high street. Lloyds is the dominating force since its rescue takeover of HBOS during the 2008 banking crisis.

Horta-Osorio, who has code-named the disposal programme Verde, insisted the 632 branch sales would be enough to bolster competition as the operation is same size of the Halifax business it bought during the crisis. "The Verde business will have strong brands, a branch network of a similar size to that of the Halifax and a full product range including savings, loans, credit cards and mortgages as well as current accounts. We believe that Verde will be a strong competitor in UK retail banking," he said.

He hopes to find a buyer by the end of the year but has not ruled out flotation if a buyer cannot be found. He said bidders could ask for the number of mortgages that are being included in the sale to change to make it easier to complete a sale.

The City has been concerned that National Australia Bank, regarded as the most credible bidder, does not appear to have submitted an indicative offer and neither has Virgin Money.

With that stripped out, and using the "combined business basis" of accounting, the bank has been using since the HBOS deal, the profits were £1.1bn, down on the £1.6bn of profit announced a year ago when the bank had heralded a return to the black.

It is prohibited from paying dividends by the EU until next year. The shares were up 1.5% in early trading at 40p but quickly reversed early gains to slump 7% and become one the largest fallers in the FTSE 100 by 9am.

The figures showed a 17% fall in the impairment charge to £5.4bn even though there was a deterioration in its loans in Ireland. The impairment charge was higher than analysts had been expecting and the bank warned there was "material downside risks" to the size of the charge.

"These include, in the UK, fragile consumer and business confidence, potential interest rate and inflation rises and reduced consumer spending. A 'double-dip' scenario – a second, shallower recession following closely the one from which the economy is just emerging – also remains a downside risk," the bank said.

Some 64.1% of the Irish portfolio is now impaired, meaning the borrower has missed at least one repayment, after a further 11% of the £27.6bn loan book became impaired. The impairment charge for Ireland pushed the international business to report a £2.1bn loss.

Horta-Osorio admitted he was continuing to "closely monitor and control our exposures" to certain European countries. The direct exposure to national and local governments of Spain, Italy, Portugal, Ireland, Greece and Belgium was £189m.

However, he stressed that the tensions in the money markets should not affect the bank's own funding needs as it weens itself off the government support that has kept it afloat since the crisis. In the first half, £75bn of government funding was replaced, leaving only £37bn of government support left to refinance.